Tax System of the Czech Republic

1. Tax System of the Czech Republic 2012

2. A briefcomparison… • economicaland • politicalsystem • others… • Taxes_at_a_Glance_2011cCZ-UZB.pdf • http://maps.google.com/maps?q=Mustaqillik+Maydoni,+Tashkent,+%D0%A2%D0%B0%D1%88%D0%BA%D0%B5%D0%BD%D1%82%D1%81%D0%BA%D0%B0%D1%8F+%D0%BE%D0%B1%D0%BB%D0%B0%D1%81%D1%82%D1%8C,+Uzbekistan&hl=cs&ie=UTF8&ll=41.31443,69.269003&spn=0.003816,0.008256&sll=41.316433,69.26675&sspn=0.007631,0.016512&t=h&z=18

3. CZECH TAX SYSTEM • Income taxes (Brief discussion of Points of Tax Impact in Circular Flow) • personal income tax • corporate income tax • social security contributions • Consumption taxes • value added tax • excise duties (mineral oils, tobacco, as a residual for example beer, wine, alcohol,) • energy taxes (electricity, solid fuels, natural gas) • Property taxes • real property tax, real property transfer tax, inheritance tax, gift tax, road tax • Environmental - green, local and administration taxes / fees

4. CzechandUzbekistan(% ofall tax revenues)http://www.mf.gov.uz/en/gos-budjet.html

6. OLD NEW Cz e c h These differences not only reflect 1/social policy choices such as public or private provision of services, e.g. old-age and health risk protection, but also 2/technical factors: some Member States provide social or economic assistance via tax reductions (lowerindicator) rather than directgovernment spending (higherindicator, if not DEBT), OR while social transfers are exempted from taxes (lower) and social contributions in some Member Statesbut not in others (18); both of these choices affect the level of the tax-to-GDP ratios. Taxation of transfers mechanically pushes the tax-to-GDP ratio up, compared to countries that pay transfers on an exempt basis. In addition, countries with a relatively high tax-to-GDP ratio often impose higher taxes on social transfers, perhaps because this is more congruent with pure horizontal equity considerations.

7. Total Taxes (including SSC) as % of GDP can sometimes be tricky… Some differences not only reflect 1/social policy choices such as public or private provision of services, e.g. old-age and health risk protection, but also 2/technical factors: some Member States provide social or economic assistance via tax reductions (lower indicator) rather than direct government spending (higher indicator, if not DEBT), OR while social transfers are exempted from taxes (lower) and social contributions in some Member States but not inothers.

8. Member States towards the centre of the EU, namely Belgium, Austria, Italy, and France, all of which had a tax ratio in excess of 40 % in 2009. Neighbouring Germany, Hungary, and the Netherlands are just below this level at 39.7%, 39.5%, and 38.2% of GDP respectively. With the exception of the Nordic Member States the geographically more peripheral countries tend to show lower tax ratios, particularly in Central and Eastern Europe. Cyprus, whose tax ratio had increased rapidly until 2007, witnessed a sharp drop in the last two years in the series, nearly six percentage points, bringing it back down to below the EU average.

9. CZECH TAX SYSTEM Sharesofdifferenttaxes in thetotal tax revenue

10. SSC added…

11. New Denmark New

12. SSC in CZECH REP. Denmark Czech Denmark Czech

13. 15 % in CzechRep. is a bit tricky, shouldbehigher, circa 22 % Uzbekistan – 22 %

14. 19 % in CzechRep. Uzbekistan – 9 % 15 % forcomm. banks • Reductionof tax rate • 24 % in 2007 • 21 % in 2008 • 20 % in 2009 • 19 % in 2010 • The rate for all withholding taxes is unified at 15 % • Uzbekistan – 6, 10, 20 %

15. The tax-to-GDP ratios AND/ORimplicit tax rates • The tax-to-GDP ratio and the breakdown of tax revenues (% of the total tax burden) into standard categories such as • direct taxes, • indirect taxes and • social contributions provide a first insight into cross-country differences in terms of tax levels and its composition in terms of tax type. • Other approach additionally provides a broad classification of taxation in three economic functions – • consumption, • labour and • capital. • The implicit tax rates or ITRs are calculated as TAX/potential tax base., i.e. average effective tax burden indicators; unlike simple measures of the tax revenue, these take into account the size of the potential tax base, which often differs substantially from one country to the other. • The term 'implicit tax rates' is used in order to distinguish the backward looking approach (weknow TAX and BAZE andcalculate ITR) from forward looking average effective tax rates calculated (derived) on the basis of the tax code. • Other different concept is nominal tax rate (TAX/tax base udjusted)

16. the taxes levied on (employed) labour income, which are usuallywithheld at source (i.e. personal income tax levied on wages and salaries income plus social contributions), represent the most prominent source of revenue, contributing almost 50 % of overall receipts on average, followed by consumption atroughly one third and then capital at around one fifth.

19. PERSONAL INCOME TAX • Tax rate: 15 % (effectively cca 23 %fromthegrosswage) • In forcesince 2008 • Until 2007: fourbracketsystemwith tax ratesfrom12 % to 32 % • Applicable to: Salariesandwages, Incomefrom business activities, Incomefromcapitalassets, Rentalincome Others…

21. PERSONAL INCOME TAX History - development of the highest tax rate

22. PERSONAL INCOME TAX • The tax base for any employee includes the gross salary increased by the employer’s health and social insurance contributions • Self-employed persons are not be able to deduct their social and health insurance from their tax base. • Taxed on month basis (12 tax advance payments) and summary (salary roll, clearing) at the end of the year • Various tax allowances (per year) - nominal tax reduction = allowance* (tax rate) • mortgage interest (till 12xaver.wage per households) • private pension insurance and life insurance (till 2x0,5aver.wage) • charity (min. 1/24xaverwage till 10 % of tax baze), !!! is not expenditure for tax purposes (example later) • Tax credits (nominal tax reduction = tax credit) • basic (1xaverwage) • wastable for dependent partner (1xaverwage) • non-wastable for children (0,5xaverwage per child)

23. Main non-standard tax reliefs • Charitabledonationsallowance: A tax allowanceofup to 10 per cent oftaxableincomeisavailablefordonationsmade to municipalitiesorlegalentitiesforthefinancingofsocial, health, cultural, humanitarian, religious, ecologicaland sport activities. The minimum limit fordonationsisthelesserof 2 per cent oftaxableincomeor CZK 1 000. • Interestpayments: Taxpayersmayclaimanallowanceofup to CZK 300 000 formortgageinterestpaymentsorotherinterestpaymentsrelated to thepurchaseortheimprovementoftheir house. If more thanoneindividualliving in thesamehouseholdapplyforthisallowance, the sum oftheirannualdeductionsissubject to theabovementionedceiling, i.e. CZK 300 000.

24. Main non-standard tax reliefs • Supplementary pension schemecontributions: Taxpayerswho are membersof a registeredsupplementaryprivate pension scheme are entitled to deducttheindividuallypaid (i.e. paid by employee) annualcontributions to a registered pension schemereduced by CZK 6 000 fromtheearnedincome. The maximum allowanceis CZK 12 000 a year. • Privatelifeinsurancepremiums: Taxpayersmayclaimanallowanceofup to CZK 12 000 forpremiumspaidaccording to a contractbetweenthetaxpayerandaninsurancecompanyifthebenefit (lump sum orrecurrent pension) ispaidout 60 monthsafterthesignatureofthecontractand in theyear in whichthetaxpayerreachestheageof 60.

26. CORPORATE INCOME TAX • CIT is levied on income from the worldwide operations of Czech tax residents and on Czech-source income of Czech tax non-residents • The Czech tax residents - entities with their seat or the place of management in the Czech Republic • Tax base is calculated from the accounting profit/loss (according to the Accounting Act and Czech accounting standards) • The accounting profit/loss is further adjusted by non-deductible costs, non-taxable revenues etc. • The tax period may be a calendar year or fiscal year

27. CORPORATE INCOME TAX • Reductionof tax rate • 24 % in 2007 • 21 % in 2008 • 20 % in 2009 • 19 % in 2010 • The rate for all withholding taxes was unified at 15 % • Losses can be carried forward for the 5 following tax periods • Extended binding rulings help to reduce administrative burden and uncertainty of firms • Investmentincentives: tax holidaysforup to 5 years (in somecaseseven 10 years)

28. PIT x CIT • adjustments of taxable income slightly differ • charity (10 for PIT contra 5 percent for CIT) • Research and development allowance (strong measure to reduce tax base)

29. Laffereffect

30. Example - Gifts as an allowance measure…gift 1 to the hospital A = 6000 gift 2 to the hospital B = 3000 gift 3 to the secondary school A= 3000 gift 4 to the secondary school A= 300 !!!!RandDalowance = 5000Profit = 100000 PIT forselfemployer CIT isdisadvatagedusually tax baze = 100000 + allgifts = 112000 MINUS RandD 107000 = intermediate tax baze MINUS allgifts (max 5% ofintermediate tax baze, 5350) adjusted tax baze = 112000-5000-5350 = 101700 isadjusted tax baze • tax baze = • 100000 + all gifts = 112000 • 112000 is caled tax baze • MINUS RandD • MINUS gifts (max 10%of 112000, soonly 11200, not 12000) • adjusted tax baze = • 112000-5000 -11200= • 958000 is adjusted tax baze

31. SOCIAL SECURITY CONTRIBUTIONS

32. VALUE ADDED TAX • A general, broadlybasedconsumption tax assessed on thevalueadded to goodsandservices • Taxable person: anindividualorcorporation in case ofeconomicactivity • Obligatoryregistration x voluntaryregistration • Tax rates: • 20% standard rate, • 10%reducedratewasincreased to 14 % in 2012 (foodstuffs, residential construction, accommodation and transport) • The reduced rate wasincreased from 5 % to 9 % in 2008 • Since 2010 thebothrateshavebeenincreased by 1 percentage point (austeritypackage)

33. VATreduced rate and baseindicator • VAT = t-statutory * tax base adjusted by tax code • VAT = ITRvat * full final consumption • we derive so called indicator of VATreduced rate and base as • standard VAT rate - ITRvat

35. VATreduced rate and baseindicator in CZECH REP • low and • will be lower (expectations based on elimination of reduced rate) • VAT tax burdenisgoing to behigher

36. VALUE ADDED TAX • Exemption with the right of deduction • Exemption without the right of deduction • Fiscal period - calendar month or calendar quarter

37. EXCISES • Fully harmonised with EU directives • Mineral oils • Petrol – 12 840 CZK (505 EUR) /1 000 l • Diesel – 10 950 CZK (431 EUR) /1 000 l • Heating oils – heavy – 472 CZK (19 EUR) /t • LPG – 3 933 CZK (155 EUR) /t • Beer • 5 rates – acording to amount of production – from 32 CZK (1,26 EUR) to 16 CZK (0,63 EUR) /hl/degree Plato • Wine • just sparkling 2 340 CZK (92 EUR) /hl • still wine not taxed

38. EXCISES • Alcohol • 2 rates – 28 500 CZK (1121 EUR) /hl etanol; 14 300 CZK (563 EUR) /hl etanol • The lower one – ethyl alcohol produced by fruit growers´ distilleries • Tobacco products • Cigarettes – minimum tax rate – 2,01 CZK (0,08 EUR) /item • Tobacco – 1 340 CZK (53 EUR) /kg • Cigars and cigarillos – 1,15 CZK (0,05 EUR) /item • Environmental (green or energy) • Coal – 8,50 CZK (0,33 EUR) /GJ gross caloric value • Gas – the basic rate – 30,60 CZK (1,2 EUR) /MWh gross caloric value • Electricity – 28,30 CZK (1,11 EUR) /MWh • in force since 2008 • All excises rates except wine and environmental have been increased since 2010 (austerity package)

39. PROPERTY TAXES • Real property tax • paid annualy from • land • buildings • Farm land can be exempt from the real estate tax • Municipalities are allowed to set the local coefficients (1 to 5) which determine the rate of real estate tax imposed on buildings • Since 2010 most of the property rates have been increased to double (austerity package)

40. PROPERTY TAXES • Inheritance and gift tax • only between non-relatives • i.e. all inheritances and gifts within the family and other relatives are exepmt • Real property transfer tax • tax rate of 3 % of the value

41. Road tax • is payable on vehicles registered and operated for business purposes • tax rates are (year period) • 1,200 - 4,200 CZK (47 – 165 EUR) forpassengercars (according to engine size for passenger cars) • 1,800 - 50,400 CZK (71 – 1983 EUR) fortrucks (according to weight and number of axles). • Some vehicles with an electric, hybrid engine or use LPG, CNG as a fuel are exempt from the tax (green tax policyissue). • Foreseen changes in the future: • exemption of passenger cars (national reasons), • increase of the tax rate for trucks (EU reasons).

42. TAX REVENUE SHARING • PIT, CIT, VAT among central, regional and local level • central government: 70 % • regions: 9 % • municipalities: 21 % • Real estate tax goes to municipalities • All other taxes go to the state budget or other central government‘s funds

43. PACKAGE OF AUSTERITY MEASURES • Has been in forcesince 2010 • Purpose – to reduce deficit of public finance • Containsrateincrease in VAT (19 to 20, 9 to 10), excises, realproperty tax and PIT (lower expense allowancesforsomeminorkindofenterpreneurs – agriculturalandhandicraftactivities 80%, otherminoractivities 60 % and 40 %)

44. Progressiveness of the VAT and excises in the Czech Republic

45. The VAT and excises in the Czech Republic Global tax mix Social Security Contribution - 43 % PIT – 12 % CIT – 13 % VAT – 23 % Excises – 7 %

46. * breakpoint 1. 5. 2004

47. Two ways of distributional tax analysis All distributional analyses are based on measurement of impact on the poor and on the rich subjects (i.e. subjects on different part of well-being scales). So the crucial question is: what should be selected as appropriate measure of well-being (of household). • annual framework • Well-being = f(annual income) • Theoretically not so appropriate • Easily measurable (appr. 90 % of distributional analyses used this approach) • lifetime framework • Well-being = f(lifetime income) • Theoretically more appropriate because the lifetime incidence approach tries to eliminate temporary fluctuations in income

48. Measures of lifetime income • Well-being = f(lifetime income) • Estimation of lifetime income is the most exciting and challenging issue in up to date distributional research. • Lifetime income can be measured (see Slintakova (2006); Metcalf (1994)) as: • the present discounted value of earned income plus bequests (gifts) received • the present discounted value of consumption plus bequests made • used in this analysis.

49. Modified lifetime income • Due to the lack of appropriate information we had to modified definition of lifetime income. We measured lifetime income as: • Current consumption (money expenditures PLUS natural consumption MINUS social insurance) • Bequests were ignored (Metcalf (1994) supported this exclusion)

50. Tax burden calculation • choose the average (typical for the selected part of income scale) households and calculate their tax burden • calculate the burden for all (and every) individual households, it means to calculate relevant tax burden for every households in the survey, and then study the differences in tax burdens. • We used microsimulation model to calculate individual tax burdens